Archives for August 2018
RISK ROUNDUP—Commercial insurance renewals come around once every year just like Christmas. Of course, renewals aren’t as much fun as a major holiday, but they can be similar in one way—sometimes they can be stressful.
So, we’ve gathered some information to help you get started (and motivated) for your next renewal.
This three-part posting includes:
- A quick Renewal Overview for small businesses;
- A Risk Management Breakdown of the renewal process for mid- to large-sized businesses; and
- Examples of renewal information (lists and schedules).
Contributors for this special Risk Roundup include American Risk Managers Vice-President Jessica Spears, who wrote the Renewal Overview, and American Risk Managers Company Founder, Owner and Chairman Walter Haney, Sr., who penned the Risk Management Breakdown.
When getting ready for an insurance renewal, one of the first things to do is to start gathering the information you will need to provide to the insurance company.
This information consists of the following: locations with values; schedules of your electronic data equipment and inland marine equipment; lists of vehicles; lists of drivers with license numbers and dates of birth; payroll; sales; and loss runs.
Once you have all of this information gathered, it is best to sit down with your current agent and discuss expectations and the market place.
After this conversation, you will be able to determine if you should have a negotiated renewal or go out to market.
It is not recommended to take your account to market every year. It devalues your account. We suggest looking at it every three to four years, unless there is an issue which leads you into the market sooner.
After this meeting, if you decide to work with your current agent on a negotiated renewal, you will need to give them all of your updates and fill out any applications, etc., needed for the renewal.
If you decide to go to market, you will need to determine which agents you would like to include.
Once that decision has been made, you will need to request a list of markets from each agent in order to assign markets. This keeps multiple agents from going to the same market and shutting it down.
After you have assigned markets, you will be ready to send out the bid specifications to all the agents bidding. They will come back to you throughout the process with various questions, applications, and additional information that they may need.
At the end of the bidding process, you will need to review all submissions and compare them apples-to-apples before making a decision.
This will consist of going back to them with questions on things that one agent might have included in their presentation and one did not.
Once you have made your decision and awarded your business to the agent of your choosing, make sure to review the binders for accuracy. You will also need to do the same with the policies once you have received those.
Renewals: The Risk Management Way
The single most important project that American Risk Managers performs for its clients is the creation of “Bid Specifications.”
This document forms the basis for the insurance to be purchased for the following year.
Bid Specifications are a compilation of all the information gathered for the individual company—to include descriptions of all properties, vehicles, sales, payrolls, losses, and any other pertinent data—as related to the individual client.
If this renewal is to be a competitively-bid placement, American Risk Managers (ARM) will request a list of preferred markets from each of the bidding agents. When these forms are received, markets will be assigned on the basis of the agents’ preference rating.
Agents of Record Letters will then be prepared to assign each insurance company to a specific agent.
All underwriting information will be provided as a portion of these Bid Specifications and ARM will continue to provide updated information for the client to each of the bidders.
All appointments, surveys or other information will be provided by the bidder, coordinating his needs through ARM.
ARM will also arrange the timing and presentation from each bidder.
Upon the completion of all presentations, ARM will provide a spreadsheet detailing all the proposals, so that management is provided with a basis for making a sound business selection.
ARM will assist clients in the placement of the insurance and will review all insurance binders and insurance policies to ensure that the coverage complies with the Bid Specifications.
No Bid Basis
If the coverage is being renewed on a “No Bid Basis,” the procedure is the same, with the exception of selecting agents, their markets, Agent of Record Letters and other attendant duties enabling multiple agents to furnish quotations.
All other preparatory measures are taken to ensure that all exposures are covered or are self-insured in the full knowledge of the insured.
Schedule & List Examples
Property Schedules can include a vast amount of information. Four basic types of information include Location Address, Year Built, Type of Construction and Square Footage.
Electronic Data Equipment Schedule
For Electronic Data Equipment, information should include Equipment Name and Number, Serial Number, and Equipment Location—such as your main office, branch name or other facility.
Inland Marine Schedule
For Inland Marine (Contractors Equipment that moves from place to place), information should include Equipment Name, Location, Date of Purchase and Value.
Vehicle Lists can also include a lot of information, including a designated Vehicle Number assigned by your company. Three other basics are Year/Vehicle Type, Cost, and Serial Number.
Drivers Lists usually include a designated Driver Number, Full Names, Dates of Birth and Driver’s License Numbers.
Regarding the other information needed for your renewal:
- You will provide an amount for “expected payroll;”
- You will provide an amount for “expected sales;” and
- You will obtain loss runs from your insurance company.
Good luck with your next commercial insurance renewal.
Hopefully, the advice shared by our Risk Managers will help save you some time and worry.
AND if you’re interested in saving money—most Independent Risk Managers can find enough savings for you to more than cover their fees.
RISK EDUCATION – Just because you’re paying premiums on Commercial Property Insurance doesn’t mean your company is adequately covered for loss.
Without setting the correct limits on your policies, you won’t receive the funds you need to completely rebuild. And even on partial loss claims, you’re probably going to lose a significant amount to Co-insurance Penalties.
This might be alarming to hear, but you’re not alone.
“A vast majority, 75-80%, of our new clients in the last 40 years have been underinsured.” —Walter Haney Sr.
But, unless you’re the Owner or CEO of a construction business, there’s a good chance you just don’t have the knowledge or experience needed to set realistic rebuilding limits.
We’re happy to offer you some suggestions on setting limits from a Risk Management perspective. But we’re also going to remind you of the need to personally consult with an Independent Risk Manager.
Your Insurance Agent’s duty is to fulfill your order based on limits provided by you. A Risk Manager will look out for your best interests—making sure correct limits are set. Plus, they can usually find increased and enhanced client coverages, AND premium savings, as well.
Key Considerations On Setting Property Limits
The process of setting limits for your company’s Property Insurance Coverage starts with establishing the needs of YOUR specific business.
If you have a brand new facility, with all new equipment, then your needs will be much different than a company that’s running its entire operation out of a portion of an old manufacturing building.
What about the size of your facility? Do you own multiple buildings? In how many different locations? What are the structures of your buildings? Are they constructed out of brick? Metal? Concrete?
What kinds of equipment, interior furnishing, inventory, and other contents will you need to replace if they’re lost or damaged?
After you establish your needs, THEN you determine the value.
Values are not something to be estimated on paper from a faraway office.
A Risk Manager will visit all the properties of their clients. They’ll walk around. They’ll take a good look at their client’s operations inside and outside. They’ll visit the manufacturing floors and observe the work in process.
For example, if you’ve been running your business for decades, you might have replaced older machinery with new technology—needing less room than before. (You won’t NEED to build back to the same size.)
Technology changes could also mean you’re using automated machinery and may have downsized the number of employees over the years. (You won’t NEED to rebuild a facility for 1,200 employees, if you only have 500.)
A Risk Manager is also going to check the prices for replacement machinery. (Do you NEED new machinery or will second-hand work just as well? Does this machinery NEED to be shipped from overseas?)
A Risk Manager will also check the construction cost by square footage based on local labor in your area. (In your city, does labor average $100 a square foot? Or are you in an area with costs around $300 a square foot?)
Another important consideration deals with insuring machinery that doesn’t stay in a fixed location, but moves around, being used in different places. Known as Contractors Equipment or Inland Marine, this type of business property also needs to be insured, with detailed lists kept and replacement limits set.
For example, a Utility Company that provides gas, power and water to its customers could use the same Inland Marine Equipment (such as backhoes, welders, trenches and cranes) in all its different departments and locations.
You’re also going to have to provide lists (called Schedules in the Insurance World) of all your computers, telephones and digitally-controlled equipment and machinery.
Costs for office contents are easily underestimated. And check to make sure you’re not still paying premiums based on new equipment 15 years later. Older equipment will be depreciated at claim time.
Again, these are just samples of numerous considerations. Hopefully, you realize by now that you and your business deserve a professional opinion.
A Risk Manager is going to make sure you’re covered. They’ll follow a detailed process that includes looking at all of your current insurance policies, closely examining all limits and values, and then comparing them to your specific needs.
They’re also going to double-check that you’re covered under the correct Property Coverage Value type, which brings us to our next topic.
Property Insurance Value Breakdowns
There are different types of Property Insurance Coverages and the one that’s best for your company is the one that best fits (you guessed it) YOUR NEEDS!
Types of Property Insurance Coverage can include:
- Replacement Value;
- Actual Cash Value; and
- Functional Replacement.
If your company is new or you’re still manufacturing the same type of items, using the same equipment and using the same sized spaces in your facility, you’re probably going to want to insure at Replacement Value, also known as Replacement Cost.
Insuring to the proper Replacement Value means you’ll be able to replace your facility and equipment—everything that is damaged or destroyed—with the correct amount of money needed to replace both its size and quality level.
Actual Cash Value
Whatever a willing buyer would pay for your facility; its structure and its products TODAY—is called Market Value, also known as Actual Cash Value. But insuring with this type of policy means that depreciation will be deducted from your insured amount.
Rebuilding a structure usually costs considerably more than its previous value because of debris cleanup and site prep, as well as increased costs for raw materials and local labor.
(Side Note: Land, driveways, parking lots, slab and foundations are not usually included in any type of policy, unless specifically requested.)
If you have an older facility and maybe only use a portion of it, or your equipment has changed with technology and you don’t need as much space, you might consider insuring for Functional Replacement, also known as Agreed Value Provision.
With this type of coverage, you’ll be focusing on needed values more than present values. You’ll be moving toward what you’d actually need to build back, if you have a claim. And you won’t take a big depreciation hit or be subjected to a Co-insurance Penalty.
Plus, there are only minimum requirements that you’ll have to meet to fulfill your end of a Functional Replacement Contract AND you and your insurance company can come to this understanding before any losses occur.
“That’s what a Risk Manager is supposed to do—settle the claim—before the claim happens.” —Walter “Wally” Haney Jr.
If you have an endorsement from your insurance company that you’re only insuring to Functional Replacement or an Agreed Value Provision, then you don’t have to worry about Co-insurance Penalties.
But if you are insuring your property to Replacement Value or Actual Cash Value, then both of these types of coverages will have Co-insurance Clauses built into the policies.
What does this mean? This means that you must set proper limits for these coverages. You can’t insure a $3 million building for only $1 million. You’ll pay a steep penalty for being under-insured. You’ll actually be considered as a “Co-insurer,” thus the Co-insurance Penalty.
Penalties are set on a percentage basis, usually 80%. But some companies could use different percentages, such as 90%.
In this case, the amount of insurance you purchased (say $1 million) would be divided by the amount you should have purchased (the $3 million) and any losses—big or small—will be reduced by this same amount.
For example, even if you only had $100,000 worth of smoke damage to your $3 million facility, since you had lower limits than you should have had, that $100,000 will be divided by 3—the same percentage as $1 million divided by $3 million (.333). You’ll get $33,333 back (less your deductible) on this $100,000 claim.
Added Protection: Business Income Insurance
A Risk Manager will not only help you establish the correct amount of Property Insurance Coverage, limits and values you need to get your business back up after a disaster, they’ll also suggest added protection.
You can have a provision included in your policy to provide extra financial help (including payroll expenses) until your business is operating to the level it was before the incident.
Known as Business Income Insurance or Business Interruption Insurance, this crucial coverage is always recommended to our clients. More information on these policies and their benefits can be found in Business Income Insurance: Protecting The Lifeblood Of Your Company.
Saving On Premiums By Using Deductibles
Okay, so you’ve learned about setting proper limits and you’ve added Business Income Insurance. Are you interested in saving money on the front-end—the premiums you pay?
A Risk Manager can take a look at your losses to see if your company would be a good fit for Self-insurance Coverage. In this case, you would be assuming responsibility for part of (or whole) building losses. The amount of loss you choose to accept is called a “deductible.”
“We’ve done this for most of our big accounts. We were able to save them a lot of money by putting in correct deductibles. And we’ve been thanked for finding such significant savings—being told our help was ‘Spot On.'” —Walter Haney Sr.
Loss Premium Models
Your Risk Manager can use Loss Runs established over the last 7 years and calculate limits that can significantly lower your premiums.
These types of equations are known as Loss Premium Models and they follow a step-by-step process.
Risk Managers will:
- Begin with your values;
- Overlay your past loss history;
- Calculate correct limits;
- Factor in different deductible amounts; and
- Determine how much you would cost yourself if you covered your losses using these various deductible amounts.
Higher deductibles can create lower premiums, as you are taking on more Self-insurance responsibility. And if you have no losses, that’s even more money you can put back into your pocket (and your business).
“You estimate possible losses over 7 years (based on your history) to see what the cost would be. It might be zero. You may not have any losses in there—particularly with property. With property, you don’t have any losses or you have big losses. You don’t have any nickel and dime stuff.” —Walter Haney Sr.
For some clients, larger deductibles can greatly reduce premiums. One company may be able to handle a $100,000 loss and easily write it off. A $10 million loss would be hard for any company to survive.
Last, but definitely not least important, is Blanket Coverage.
You can get Blanket Coverage and Blanket Limits so that you can insure multiple locations and different types of polices.
You establish a specific Blanket Limit, but the entire coverage amount can also be used to fulfill a claim at one location, two locations—or all locations—up to that Blanket Limit.
You can also buy Blanket Limits for Equipment, Third-party On-site Contractor Equipment and (our good friend) Business Interruption Insurance, as well as for any other risk exposures you may have.
“You never know where a claim will occur, how long your business will be down, or how many people will be involved. Blanket Limits cover everything UP to the limit that you bought—it doesn’t matter where the incident occurs.” —Walter Haney Sr.
We hope you’ve found this post helpful and now realize the importance of prioritizing this issue to help protect your company. And we also hope you never have a reason to test the limits of your policies.